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    Oct. 17, 2024

A New Role for Seed Investors: Enhancing Evergreen Fund Liquidity Via a Committed Equity Backstop Facility

Evergreen funds have rightly been heralded as a key solution to balance the benefits of exposure to illiquid asset classes while attempting to meet investors’ liquidity preferences. However, that balance becomes precarious during periods of net redemptions (i.e., when new redemptions are greater than new subscriptions), which can frustrate the practical liquidity that evergreen vehicles offer by forcing redeeming investors into liquidating accounts. A solution to that problem may exist in creating a structure that incentivizes traditional seed investors or other strategic capital with a long-term mandate to backstop net redemptions via a committed equity backstop facility. That approach may offer substantial benefits to both strategic investors willing to assume that role and to fund investors for whom liquidity may otherwise be illusory, as well as to GPs of evergreen funds by improving their fundraising opportunities and overall fund stability. In a guest article, Seward & Kissel partner Gerhard Anderson describes how a committed equity backstop facility would practically work by leveraging traditional seeding arrangements; some of the economic benefits, additional protections and bolstered rights that could inure to strategic investors; advantages that GPs and fund investors could reap; its potential impact on fundraising; and how it compares to other forms of liquidity solutions. For additional insights from Anderson, see “Trends and Key Drivers in PE and Private Credit Seeding Transactions” (Jul. 11, 2024); and “The New Trend in PE Fund Seed Investments, Unique Deal Features and Several Options for Seed Sources” (Mar. 17, 2020).

SEC Sanctions Fund Manager for Misleading Hedge Clauses Despite Accompanying Savings Clauses

The SEC has been increasingly critical of provisions purporting to limit an adviser’s liability – known as hedge clauses – and their potential to mislead investors, particularly in a retail context. In fact, the Commission attempted to ban hedge clauses in the proposed version of the private fund adviser rules, although that provision was excluded from the final version of the since-vacated rules. Fund managers have long thought the Commission’s concerns were adequately addressed by including disclaimers alongside hedge clauses that compliance with state and/or federal securities laws are not waivable, known as savings clauses. A recent settlement order (Order) makes it clear, however, that the SEC believes improperly drafted savings clauses are no less misleading to investors. The Private Equity Law Report interviewed several industry experts to understand some of the SEC’s concerns about the use of hedge clauses; the limits of savings clauses and ways they can be bolstered; possible implications of the Order going forward; and steps advisers may want to consider taking in light of the SEC’s focus on the issue. This article summarizes key parts of the Order and provides additional insights from those experts. For coverage of other recent SEC enforcement activity, see “Actions Highlight Advisers’ Responsibility to Accurately and Honestly Communicate With Investors” (Apr. 4, 2024); and “Action Targets Non-Violative Use of MNPI Through Policy and Procedure Failures” (Mar. 7, 2024).

Practical Challenges and Potential Conflicts of Interest When Operating Hybrid Funds (Part Two of Two)

Fund managers that launch hybrid funds containing features of both open- and closed-end funds are often acutely aware of some of the complications and practical issues that need to be negotiated in fund documents with LPs to ensure the structure is workable and sound. Often overlooked, however, are the operational struggles that can accompany hybrid funds, including the employment of qualified employees and third-party vendors and the development of tailored policies and procedures to mitigate conflicts of interest. Those and other issues caused by hybrid funds were addressed at a panel hosted by the Practising Law Institute as part of its Advanced Issues in Private Funds 2024 program. Moderated by Cleary Gottlieb partner Maurice R. Gindi, the panel featured Matthew Jill, partner and GC, private funds and secondaries at Ares Management; Barbara Niederkofler, partner at Akin; and Amelia Stoj, CCO and assistant GC at Foresite Capital. This second article in a two-part series analyzes key features and considerations when operating a hybrid fund, including as to LP discussions, operational challenges, management fees, carried interest, clawbacks and conflicts of interest. The first article discussed the fundraising benefits and challenges presented by hybrid funds, as well as several types of liquidity mechanisms that managers can wield to meet their LPs’ withdrawal needs. See “Structural and Operational Considerations for Hybrid Funds” (Feb. 23, 2021).

Global Trends and Developments in ESG Regulations: U.S. and U.K. (Part One of Two)

Despite reports of a diminished role for environmental, social and governance (ESG) investing in the private funds industry and an outflow of capital from underperforming ESG funds, investor interest remains strong, and the market continues to be vibrant. In response, regulators – particularly in the U.S., U.K. and E.U. – are continuing to steadily enact regulations to ensure the burgeoning investment sector proceeds in a compliant and, unironically, responsible manner. To assist asset managers in navigating the complex, often conflicting and constantly evolving ESG landscape, Morgan Lewis hosted a webinar outlining and comparing global ESG regulations. The program was moderated by Carl A. Valenstein, and featured his partners Kelly L. Gibson, William Yonge and Elizabeth S. Goldberg. This first article in a two-part series details the status of the SEC’s recent rulemaking efforts, the Commission’s enforcement practices targeting ESG issues and the latest on the state-level anti-ESG movement, along with updates on sustainability-related rulemaking and enforcement actions in the U.K. The second article will summarize the attitude toward ESG and recent relevant initiatives in the E.U., Asia, Africa and the Middle East. For additional commentary from Morgan Lewis, see our two-part series: “Russia Sanction‑Related Difficulties and Japan’s Efforts to Become a Private Funds Hub” (Aug. 2, 2022); and “Broad Assessment of Regulatory Updates in the U.K. and E.U., and Trends in Shari’a‑Compliant Funds in the Middle East” (Aug. 16, 2022).

SEC Commissioner Uyeda Discusses Private Offering Framework and Accredited Investor Definition

In remarks at the 51st Annual Securities Regulation Institute, SEC Commissioner Mark T. Uyeda offered his views on the existing exempt offering framework, urging the agency to eschew “paternalistic” regulations that could limit individuals’ access to investments and hinder capital raising by startup companies. He also urged the SEC to consider adopting a “sliding-scale” approach to accredited investor status that would tie an individual’s access to private investments to the individual’s investment experience. This article parses Uyeda’s remarks. As usual, the views expressed were Uyeda’s own, not necessarily those of the SEC or any other commissioner. See our two-part series on the accredited investor definition: “Proposed Changes and SEC Commissioner Perspectives” (Mar. 3, 2020); and “Key Takeaways for Private Fund Managers” (Mar. 10, 2020).

Davis Polk Adds Fund Formation Team in New York

Andrew M. Ahern, Alisa A. Waxman and Luke P. Eldridge have joined Davis Polk as partners in the firm’s New York office. Each attorney advises sponsors of a variety of fund types, including traditional private funds, co‑investment vehicles and separately managed accounts. For insights from Davis Polk, see “2024 SEC Examination Priorities: New Approaches to Old Areas of Concern” (Dec. 14, 2023); and “PE in a Recession: Tips for Tailoring Fundraising Efforts, Anticipating Demand for Secondaries and Managing Co‑Investments (Part One of Three)” (Sep. 20, 2022).

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